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ECN 203 Lecture Notes - Lecture 16: Market Power, Demand Curve, Natural Monopoly

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ochreporpoise133
10 Apr 2017
School
Syracuse University
Department
Economics
Course
ECN 203
Professor
Ali

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Document Summary

The process of entry or exit is complete when p = atc. In the long run, p = minimum atc. At this long run equilibrium, firms earn zero profit. So, in the competitive equilibrium: p = mc. Monopoly: a firm that is the sole seller of a product without close substitutes. A monopoly firm has the market power. The ability to influence the market price of the product it sells. A competitive firm has no market power. The main cause of monopolies is barriers to entry - other firms cannot enter the market. A single firm owns a key resource. Ex: de beers owns most of the world"s diamond mines. The government gives a single firm the exclusive right to produce the good. Natural monopoly: a type of monopoly that exists as a result of the high fixed costs or startup costs of operating business in a specific industry.

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Related Questions

Consider the following market demand schedule and total costs for a monopoly.

Q P TR TC MR MC Profit                                        
0 45   4                                              
1 40   9                                              
2 35   19                                              
3 30   39                                              
4 25   61                                              
5 20   91                                              
6 15   130                                              
7 10   172                                              

a) Fill in the blanks.

b) How is the relationship between price and MR different between monopolistic and perfectly competitive markets?

c) Would the demand curve facing a monopolistic competitive market be more or less elastic than the demand curve facing a monopolist, why? Do firms in a monopolistically competitive market make long-run economic profits, why or why not?

1. A firm that is a pure competitor has P > ATC and P > MC on the output (Q) it is presently producing and selling. Is this firm maximizing its profits? If not, which direction should it change its output if it wants to maximize its total profit?

2. Is a pure competitor in short-run or long-run equilibrium if it has P=MC=ATC? Explain.

3. There is free entry in the model of pure competition. Assuming that P > ATC for a vast number of firms producing a standardized product for a given market, what will happen to market supply as the consequence? What will happen to the market price (P) of the product these firms are producing?

4. Firms in the pure competition have horizontal demand functions. (The market determines product price, so firms in this competitive market are price takers.) Do firms in this model have to lower prices if they want to sell more output? Why or why not?

The market for wheat consists of 500 identical firms, each with the total and marginal cost functions shown:

TC = 90,000 + 0.00001Q2

MC = 0.00002Q,

where Q is measured in bushels per year. The market demand curve for wheat is Q = 90,000,000- 20,000,000P, where Q is again measured in bushels and P is the price per bushel.

a. Determine the short-run equilibrium price and quantity that would exist in the market.

b. Calculate the profit-maximizing quantity for the individual firm. Calculate the firm's short-run profit (loss) at that quantity.

c. Assume that the short-run profit or loss is representative of the current long-run prospects in this market. You may further assume that there are no barriers to entry or exit in the market. Describe the expected long-run response to the conditions described in part b. (The TC function for the firm may be regarded as an economic cost function that captures all implicit and explicit costs.)